First pension(no company schemes)

imported_Ducklet

I'm 23 and currently working full-time within the computing industry in Scotland. The problem is I have no pension and my employer doesn’t provide any option for this. I have just bought my first property (needed to move closer to work) so I’m up too my eyes at the moment, plus I will start paying back my student loans (15k) as of this year. Any suggestions on what type of pension to set up and roughly how much to put into it? I have been topping up my national insurance contributions for previous years (had to do this as I went to uni but didn’t make sufficient money through PT jobs!)Please help!

dunstonh

Type can be stakeholder, personal or SIPP (amongst others). Depending on your circumstances and views, one of those may be appropriate. Smaller contributions would focus on the first two.

Amount should be affordable. Perhaps getting started at this stage is the priority and then look to top up the plan in say £15 to £10pm steps over the coming years. That way you dont take the hit in one go.

The problem with debt is that people pay it off and then borrow again. Some say pay off debt first, some say do both. There isnt really a right or wrong but if you never pay of your debt or do it when you 60, then you have problems if you havent looked at the other areas.

imported_Ducklet

Thanks for your reply! Was just looking up information on what a stakeholder pension was-it sounds like an ok option at the moment. The self invested pension plan sounds daunting! Also instead of paying into a stakeholder pension i was thinking about putting money into an ISA. What would you recommend, an ISA or stakeholder pension?

dunstonh

No-one is recommending anything here. That is not allowed. We are just discussing options for you to investigate.

SIPPs are designed for more experienced investor or those with larger funds available. Stakeholder pensions are budget pensions, usually with limited fund availablity. Personal Pensions can be more expensive or cheaper over the term than a stakeholder depending on provider and the options you take. The options, charges and fund choice varies widely with a Personal pension so more research is required if you use that option.

A pension obtains tax relief on the contributions. ISAs do not. The tax treatment of the investment funds is the same. The charges are much the same. Sometimes lower, sometimes higher but not much different. So assuming same investment funds, the pension will end up with the higher fund value. (Higher rate taxpayers or those in receipt of childrens tax credits can further benefit from pensions)

However, currently, you are only allowed to take 25% of the final sum as a tax free lump. The rest of it has to purchase an annuity. That annuity then provides your income for the rest of your life. The ISA is available as a 100% tax free lump sum. If you use that to provide an income, it will be about the same as the pension.

In reality, both products are used by many people to provide for their retirement. The younger you are the more favourable the pension is due to the investment growth on that tax relief. As you get closer to retirement you may seethe ISA being more attractive.

So, at your age, you may consider the pension more appropriate. As to whether it is stakeholder or personal, that depends on you

Tel_4

Lets make things simple.

A Stakeholder plan is a Personal Pension Plan.

The difference between a Stakeholder PPP and a PPP is the charges.

The Stakeholder charges are capped at 1%. If it is a non Stakeholder PPP the charges may be higher.

Currently, pension contributions are more tax efficient than ISA'S because they receice tax relief on the contribution. Eg, if you are a basic rate tax payer for every £1.00 you pay into a pension the Govt pay in 22p.

The downside is that you have to buy an "annuity" with your pension fund when you come to retire. Your pension fund is converted into income by an "annity rate". Annuity rates are falling as we are all on average living longer, so the amount of income you get in retirement is falling too.

The income you get from your annuity is taxed.

ISA'S dont receive tax relief on the contribution, BUT you can take the whole fund as a lump sum, you do not have to buy an annuity with it, and you will not be taxed on the lump sum payment.

Contributions into an ISA and a Stakeholder PPP grow largely free of income and capital gains tax.

Hope this helps.

T.